Indias Demographic Dividend: Asset or Liability?: India Knowledge@Wharton(
Indias Demographic Dividend: Asset or Liability?: India Knowledge@Wharton(
Indias Demographic Dividend: Asset or Liability?: India Knowledge@Wharton(
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2013 ka wi india's demographic divident - asset or laibility

  1. 1. Indias Demographic Dividend: Asset or Liability?: India Knowledge@Wharton( Demographic Dividend: Asset or Liability?Published : January 09, 2013 in India Knowledge@WhartonHalf a century ago, there was only one answer to the question ofIndias growing population. In a 1967 book titled Famine 1975!:Americas Decision: Who Will Survive?, U.S. economists Williamand Paul Paddock even advocated that the population of Indiashould be allowed to starve as the country was a hopeless case.America should allocate its aid dollars to other countries withgreater chances of being able to feed their hungry, the authorsargued.Ten years ago, the Indias growing masses -- the populationofficially crossed one billion in 2000 with the birth of Aastha Aroraon May 10 of that year -- were still considered a liability by many. This is a single/personal use copy of India Knowledge@Wharton. For multiple copies, custom reprints,Providing basic needs for all seemed to be a near-impossible task. e-prints, posters or plaques, please contact PARS International: P. (212) 221-9595 x407.Somewhere along the line, however, economists discovered a silverlining: The world was aging, but India was growing younger. There was a "demographic dividend" thatthe country could hope for, and ultimately exploit. Ann April 2012 International Monetary Fund (IMF)paper titled, "Asia and the Pacific: Managing Spillovers and Advancing Economic Rebalancing," notedthat "in many Asian countries, aging populations are now causing, or are about to cause, a decline in theworking-age ratio. The Japanese workforce has been shrinking since 1995, and the Korean workforce willstart to decline beginning 2015. Chinas working-age ratio will peak in 2013 and then decline by asubstantial amount in the next few decades.... The second most populous country in the region (and theworld) affords grounds for cautious optimism. Indias demographic transition is presently well underway,and the age structure of the population there is likely to evolve favorably over the next two to threedecades." The democratic dividend could add 2 percentage points to per capita GDP growth per annum,according to the IMF.There are some challenges related to those seemingly favorable demographics, however. The first is infinding jobs for all these people. Second, and more importantly, Indias young people will need to developthe right skills for the modern job market.Different Views on Job GrowthOpinions on future job growth diverged at the recent 20 th Anniversary Symposium of the University ofPennsylvanias Center for the Advanced Study of India. During a panel discussion titled, "Building anInclusive India," one speaker envisioned the country exporting armies of skilled labor to the world.Another worried about a generation of unskilled Indian workers left behind. "Only 5% of Indias laborforce is estimated to have had any formal training," said panelist S. Ramadorai, vice-chairman of TataConsultancy Services and an advisor to the Prime Minister for the National Council of Skill Development.Developing Indias human capital is essential in the coming decade, Ramadorai noted. To makemanufacturing a genuine engine of growth, the government has announced new policies as part of the12th five-year plan (2012-2017) that aim to create 100 million work opportunities by 2022 -- many inlabor-intensive manufacturing sectors such as textiles, gems and footwear.The government is also working to expand access to education and vocational training for workers in thecountryside, including new rural broadband networks that will connect remote areas with educationalopportunities. "Technology is going to play a very critical role in connecting the haves and the have-nots,"Ramadorai said.   All materials copyright of the Wharton School of the University of Pennsylvania.                    Page 1 of 3 
  2. 2. Indias Demographic Dividend: Asset or Liability?: India Knowledge@Wharton( the right skills and training, Ramadorai sees workers from India prospering not only at home butalso abroad. According to the United Nations, the working-age population will increase by about 600million globally in the next decade. While there will be a decline in the developing countries by almost 17million, the global economy as a whole is expected to experience a skilled manpower shortage of 56million by 2020, he added.India will be one of the few countries in the world with a working age population that exceeds its numberof retirees. "By 2020, the average Indian will be only 29 years of age, compared with 37 in China and theU.S., 45 in Western Europe, and 48 in Japan," Ramadorai pointed out. That means India will experiencean age advantage for at least three decades, through 2040. "So this is where I see an unprecedentedopportunity," he added. The future is bright "if Indians skill themselves to suit the future demand for jobsboth domestic and abroad."If India can make employment and skill level a priority, it might be able to fill the gaps in the worldsmanpower shortage and "become the resource pool of the world," Ramadorai said. "We need to see thisas an opportunity," he added. Getting Indias labor pool ready for export will be "the largest and mostcomplex human resources exercise in the world."Arvind Subramanian, a senior fellow at the Peterson Institute for International Economics and seniorfellow and director of the India Initiative at the Center for Global Development, was more skepticalabout Indias ability to train its unskilled workforce. "I hope Mr. Ramadorai will succeed in his mission,because India needs that, but Im a little more pessimistic," he said. India suffers from a "precociousmodel of development," Subramanian noted. "We have developed based on skilled services rather thanusing our abundant pool of unskilled labor. All of East Asia, even China, in the early phases developedusing low-skilled, abundant labor. We have completely neglected that."Anomalous FDI FlowsIndias "precocious" development is seen most clearly in "the uphill flow of foreign direct investment(FDI)," Subramanian said. In theory, economists believe that rich countries should produce thetechnology, know-how and capital and then shift those resources to poorer countries in the form of FDI.But today, emerging countries like Brazil, China and especially India are showing comparativeadvantages in certain skilled areas such as management and finance -- and are exporting FDI as a result.Chinas FDI goes mostly to emerging African countries, which is consistent with the traditional economicmodels, Subramanian noted. "But India is completely anomalous, completely precocious. We export FDIto the richest countries in the world. That shouldnt be happening at all."It will be difficult at this point for India to build a manufacturing sector for unskilled labor, Subramaniansuggested. "That is not going to happen." Much of manufacturing today is already shifting toward robotsand machines. "Within manufacturing, its become much more skill intensive. Within our exports, itsbecome more skill intensive. It is not becoming unskilled-labor intensive," Subramanian said.Indias only other option is to upgrade workers skills so that as the economy demands more skilled labor,there will be a supply of people to fill those positions. Subramanian expressed doubt that India could trainworkers fast enough. "While there will be very good private sector initiatives to respond to this, I think thepublic sector will just not be able to supply the kind of skills in the quantities that we need goingforward," Subramanian noted. "What that means is that one or two cohorts of unskilled labor will get leftbehind."Subramanian called the scenario "an unavoidable and inevitable consequence" of Indias precociousmodel of development. "I think we have a problem on our hands," he added.The Debate in IndiaThe employability issue is the focus of a heated debate in India, with strong arguments from both sides.The National Association of Software and Services Companies (Nasscom) has published a study sayingthat only 25% of information technology (IT) graduates are employable. This has drawn a strong reactionfrom the All-India Council for Technical Education (AICTE), the governments accreditation agency.   All materials copyright of the Wharton School of the University of Pennsylvania.                    Page 2 of 3 
  3. 3. Indias Demographic Dividend: Asset or Liability?: India Knowledge@Wharton( to the AICTE, every year, one million engineering graduates and diploma holders are added tothe workforce. If the number of unemployed engineers was anywhere near what Nasscom claims, "therewould be civil war," AICTE chairman S.S. Mantha told the media recently.The IT sector has been the biggest recruiter in recent years and has attracted many studies. A report byAspiring Minds, a Gurgaon-based employability assessment firm, highlighted the skills gap, particularlyin the product space. According the report, titled "The National Employability Report, EngineeringGraduates, Annual Report-2012," although India produces more than 500,000 engineers annually, only2.68% meet the skill requirements of the IT products sector. The report estimated that nearly 92% ofengineering graduates in India lack computer programming and algorithms skills and around 56% lacksoft skills and cognitive skills.The report further noted that only a very small percentage of engineers have the competence to applyengineering mathematics to solve problems. "There is a clear and measurable distinction between thetalent required to develop IT products vis-à-vis typical IT services talent. While we observe employabletalent is spread across all kinds of colleges, building Indias prowess in IT products would requiresignificant focus and investment in training and evaluating students in core technology," HimanshuAggarwal, CEO of Aspiring Minds said in the report.Sanjay Modi, managing director of online recruitment firm for India, the Middle East andSoutheast Asia, suggests that there is a lack of adequate communication and collaboration between thegovernment, academia and industry in India. "For instance, while business has changed drastically in thepast 10 years, the curriculum in educational institutions is the same as it was a couple of decades ago.And the sheer process of bringing in any change in the curriculum is so tedious that it simply gets boggeddown," says Modi. "What is needed is a strategy of three Es -- education, employability and employment.What we have to focus on first is education. This will lead to higher employability."In an earlier India Knowledge@Wharton article, Manish Sabharwal, chairman of TeamLease Services, aleading human resource services provider, pointed out that skill development is only one part of thesolution. Sabharwal noted: "There are three problems in the current Indian system: matching supply anddemand, repairing supply for demand and preparing supply for demand. What we are all focusing on rightnow in terms of employability ... is only the repair part. This is a low-hanging fruit. But this repairpipeline will run dry if the prepare pipeline, by way of education reforms, is not fixed. And that issomething that the government and academia need to work on."A Global ProblemThis is, of course, not a problem for India alone; it is more important in the country, however, because ofthe numbers involved. According to a recent McKinsey report titled, "Education to Employment:Designing a System that Works," there is a huge gap in almost all countries between what the educationalsystem feels it provides and what employers think they get. In the U.S., 87% of the education providersanswered the question, "Are graduates adequately prepared?" in the affirmative, while only 49% of theemployers agreed. India actually scored better, with figures of 83% and 51%. The gap was the widest inGermany followed by the U.S. "Seventy-five million young people -- 12.6% of global youth -- areunemployed yet only 43% of employers report there are enough qualified entry-level candidates,"according the McKinsey study.S. Krishnaswamy, senior professor and head of the department of genetic engineering at MaduraiKamaraj University, says that all of these reports are doing a good job of raising awareness. "There iscertainly a problem, but its not insurmountable," he notes. "Indians are extremely adaptable. They learnvery fast, too."This is a single/personal use copy of India Knowledge@Wharton. For multiple copies, custom reprints, e-prints, posters or plaques, pleasecontact PARS International: P. (212) 221-9595 x407.   All materials copyright of the Wharton School of the University of Pennsylvania.                    Page 3 of 3